NORTH AMERICA'S FIRST EXPERIENCE WITH PAPER
MONEY: CARD MONEY IN NEW FRANCE

by Martin Masse

This
presentation was delivered at the
Austrian
Scholars Conference organized by the Ludwig von Mises Institute
on March 18, 2006, in Auburn, Alabama.

Everybody knows that New Orleans was founded by the French. But the
area where we stand in Alabama also used to be part of the French
North American empire in the 18th century. Not far from here, north of
Montgomery, was a military fort called Fort Toulouse. The French
controlled one third of the continent at the time.

The reason why I have to deliver this presentation in English today,
however, is of course that the French lost most of their empire in
1763, at the end of the Seven Years' War  or what Americans call the
French and Indian War.

The French were great
explorers but, as the saying goes, their empire was a giant with clay
feet. Although France was by far the largest country in Europe  it
had 20 million inhabitants in 1700, compared with six million for
England and Wales  it sent very few settlers across the Atlantic.
Most of the ten million or so French Canadians who live in Canada and
the U.S. today are descendants of only some ten thousand settlers who
stayed on this continent.

Huguenots were forbidden
to settle in the colony and hundreds of thousands went elsewhere in
Europe and North America instead. But the main reason why so few
Frenchmen crossed the Atlantic is that there was not much to do in
Canada  not because of the weather, to which colonists quickly
adapted, but because of the abysmally stupid French economic policy.

Mercantilism was of
course the official doctrine in France, just like in England. The
colony was seen as a source of raw materials for the benefit of the
mother country. The fur trade with the Indians was its main economic
activity. This could have allowed colonists to accumulate some capital
to develop other activities. But during most of the period, it was in
the hands of a monopoly, and profits went to France instead of being
reinvested in Canada.

There weren't many
opportunities for investments anyway. There was very little that could
be profitably produced in Canada. Apart from small-scale crafts,
manufacturing was forbidden when it would bring competition to
metropolitan producers. The prices of various goods were controlled.
And silliest of all, trade with the neighbours  the English colonies
to the south  was forbidden, although contraband was widespread.

One thing the French
managed particularly badly was money. Until the 1660s, when there were
still only about 3,000 French settlers in the St. Lawrence Valley,
economic exchange in the colony took place primarily by barter. Beaver
pelts constituted the most commonly traded commodity, but other types
of pelts, as well as liquor, served as alternative media of exchange.
Religious orders brought some money to the colony, and once a year,
the King would send a large sum to pay for the administration and the
soldiers stationed in the colony. Most of that money was paid to
metropolitan merchants for imported goods and brought back to France.

The government started
manipulating the money in 1661, by ordaining that the value of
currencies circulating in Canada should be 25% higher than their
nominal values in France. This was designed to induce currency
imports, favour the monetization of economic exchange and integrate
colonial economic activity with that of the mother country. But of
course the revaluation had its perverse effects. It led to an inflow
of poor quality French coins containing a large proportion of copper,
while merchants only accepted gold and silver coins as payment. By
most accounts, the price level in Canada gradually increased to
accommodate the revaluation so that the purchasing power of
metropolitan currency was unchanged in the long run.

In his History of
Money and Banking in the United States, Murray Rothbard writes
that apart from medieval China, the world had never seen government
paper money until the colonial government of Massachusetts emitted a
fiat paper issue in 1690. In a footnote however, he explains that the
only exception was a curious form of paper money issued five years
earlier in Quebec, which became known as "card money."

Playing Card Money
1685-1728 (front)

Playing Card Money
1685-1728 (back)

You won't be surprised to learn that war and protectionism had
something to do with the appearance of paper money, in both New
France and Massachusetts. To simplify a bit, the two empires were
then vying for control of the Great Lakes area, which at the time
was the new frontier of the fur trade. The Dutch and English
merchants in Albany, New York, were able to offer a higher price
than the French for the pelts and were attracting some of the
Indian allies of the French, as well as French adventurers who
were selling fur in contraband. They were also arming their
Iroquois allies and encouraging them to attack French parties and
their Indian allies.

The French were constantly at war with the Iroquois. In 1684, new
soldiers had arrived from France for another campaign against them.
However, in the fall of that year, the annual appropriations failed to
arrive. The intendant of the colony, Jacques de Meulles, had no
funds to pay colonial officials and troops. (The intendant was
what could be called the top bureaucrat in the colony, second only to
the governor who represented the king.)

In June 1685, he decided
to issue his own credit notes. Because good paper was rare, he
collected the playing cards in the colony and, with his seal and
signature, issued them in various denominations as paper money. By an
ordinance, the cards became legal tender and merchants had to accept
them.

It is perhaps just a coincidence, but it is
certainly fitting that inflationary paper money, which is often called
funny money, appeared on this continent as playing cards with a
bureaucrat's signature on them.

It is
perhaps just a coincidence, but it is certainly fitting that
inflationary paper money, which is often called "funny
money," appeared on this continent as playing cards with a
bureaucrat's signature on them. At first however, the issue
of card money was not inflationary. The cards were backed by
funds that were supposed to arrive from France, and were
fully redeemed when those funds arrived. From the point of
view of the authorities, they also had the advantage of
being worth nothing to New Yorkers and New Englanders. They
could not be used for trade and did not contribute to any
outflow of currency  trade and currency outflow of course
being bad from a mercantilist perspective.

Five years later, the
French and the English were again at war with each others.
In 1689, during the Glorious Revolution, William of Orange
had acceded to the English throne, and James II had fled to
France. In North America, there were raiding parties on both
sides of the border and major invasion plans were drawn up.
A French plan to invade the city of New York and deport its
population never materialized. But in the summer of 1690, a
flotilla of 32 ships with 2000 men left Boston, while 2500
English soldiers and Indian fighters left on foot to invade
the St. Lawrence Valley. Fortunately for my ancestors, bad
weather, luck and an epidemic of smallpox among the troops
saved New France.

The English had to return
to Boston without any booty. Soldiers were grumbling for
their pay and there was fear of a mutiny. The Massachusetts
government tried without success to borrow from Boston
merchants. In December 1690, it decided to print £7,000
pounds in paper notes and, as Rothbard explains, pledged
"that it would redeem them in gold or silver out of tax
revenue in a few years and that absolutely no further paper
notes would be issued. Characteristically, however, both
parts of the pledge went quickly by the board: The issue
limit disappeared in a few months, and all the bills
continued unredeemed for nearly 40 years." Massachusetts
would again issue massive amounts of paper money after
another failed expedition against Quebec in 1711.

As might be expected, in
Canada too, the intendant got into the habit of
issuing card money. As confidence in the new money grew, the
population began to regard it as a stable asset and to
retain a proportion instead of redeeming their entire
holdings every year. But instead of keeping currency
reserves to cover the card money still in circulation,
colonial authorities increased their spending. They also
started to issue card money in excess of the French
government's annual appropriation. The cards were very
useful but prices started increasing as people realized that
there were more and more of them in circulation.

In the early 1700s, the
War of the Spanish Succession extended to the French and
English colonies in North America. Military spending rose
continuously and the growth in the supply of card money far
outstripped that of the colonial budget. In 1705, the French
Crown refused to redeem all of the card money presented to
it, which amounted to a devaluation. The colonial
authorities responded by creating more. Inflation was
running rampant and the colonial economy was in disarray. In
1714, the Crown decided to get rid of this system and to buy
back the cards at half their face value.

For some years, the
monetary situation reverted to what it had been before 1685.
Various attempts were made to provide the colony with a
stable currency, which only ended up creating more
confusion. In 1729, a new issue of card money was made. By
this time however, it wasn't the only form of paper money,
nor the most important. The government started issuing
promissory notes, which were redeemable by a bill of
exchange on the Naval Treasury, in outlying regions where
currency and even card money was in short supply. Unlike
card money, they could be issued by any number of military
officers and control of their supply lay beyond both the
intendant and the metropolitan government. The inflation
thus created amounted to a tax to finance military
expenditures. (Robert Armstrong)

The situation
deteriorated until the fall of Quebec City and Montreal in
1759 and 1760, which brought about the final end of the
French regime. The war years were marked by economic
breakdown and something close to hyperinflation. During the
peace negotiations, France agreed to convert card money and
Treasury paper into interest-earning debentures, with
discounts ranging from 50 to 80 per cent. However, with the
French government essentially bankrupt, these bonds quickly
fell to a discount and, by 1771, they were worthless.

A Quebec historian,
Gιrard Filteau, wrote (my translation):

What is remarkable about the Canadian financial system
is that it inaugurates a new kind of money destined to
have a great future: the cards are the first banknotes
in circulation. Another remarkable fact is that the
country has no asset, no monetary reserve to guarantee
the value of its paper money. This money is nothing but
a representative sign, which gets its value from the
honesty of the government and the goodwill of the royal
treasury. Such a guarantee, based solely on morality, is
insufficient in that it ties the value of money to the
good behaviour of a few bureaucrats, and imposes on it
fluctuations that depend on the integrity of some men
and the vicissitudes of politics.

At the time of the conquest, there were only 70,000
colonists in New France, as opposed to more than a million
in the English colonies to the south. Paper money helped to
destabilise and slow down the economic and demographic
development of New France. It contributed to the downfall of
the French empire in North America. Later, it would play a
substantial role in the French and America revolutions.
Today, unfortunately, it is used the world over and
continues to distort economic calculations.